Estate Planning in a Bear Market

Summer 2008Cole Schotz DocketAttorneys: Samuel Weiner and Lori I. Wolf

While the bear market is negative by almost all accounts, it can create wonderful estate planning opportunities. 

First, as real estate brokers will attest, the value for real property has diminished and sales of real property are down.  The relatively low values applicable in valuing a taxpayer’s principal residence, vacation home or commercial or rental property can be utilized with various estate planning techniques to remove real estate from the taxpayer’s estate at a low tax cost.

For example, a primary residence or vacation home can be gifted to a qualified personal residence interest trust (“QPRIT”), which gives the owner the right to live in the home for a term of years, and after the term expires, the home will pass to children or a trust for their benefit.  The value of the gift to children is based on numerous factors, the most important of which is the value of the property today.  Further discounts are built in due to the fact that the children have to wait for the term to expire to receive the home and they may never receive the home, if the taxpayer dies during the term.  By utilizing this technique now, when property values are low, the value of the gift by the taxpayer to children is suppressed.  Further, all appreciation on the home’s value once the bear market turns around will be out of the taxpayer’s estate in a tax free manner.

Investment property held individually or in an entity such as a corporation or a limited liability company can similarly be gifted to designated family members in a leveraged fashion.  In each of these planning techniques, the value of the interest or real property transferred will be determined based on the current value of the real property.  Future appreciation on the property, as well as income generated by the property, will be outside of the taxpayer’s estate.

Real property does not present the only planning options in this bear market.  Marketable securities can be utilized effectively in connection with planning.  It is impossible to know whether an individual’s investments are at their lowest values or whether there is further yet for these investments to drop; however, the market is not currently thriving.  Taxpayers can gift shares to children or trusts for their benefit at low values, and the shares will grow out of the taxpayer’s estate.

Other techniques thrive in this bear market due to currently low interest rates.  For example, using grantor-retained annuity trusts or selling assets to a grantor trust can be a particularly effective way to transfer assets to children due to low interest rates.

With all of these techniques, it is important to recognize that the donee’s basis in the gifted assets will be based on the taxpayer’s basis; so it is important, where possible, to utilize assets in the planning which have a high basis in the taxpayer’s hands.  Alternatively, if the taxpayer dies holding the assets, the assets would have a stepped-up basis equal to the value of the assets on the date of the taxpayer’s death. 

While there are planning techniques that are more successful in this bear market, there are also planning techniques that are less successful due to the financial environment.  For example, techniques that depend on growth in assets’ values are risky at this time. 

It is impossible to fully describe the planning options in a bear market in this short article or to fully explain how the techniques mentioned operate; however, it is important that you carefully consider planning options available in this economy.


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